Retirement Plan Market Losses and Their Recovery
How bull and bear markets affect the value of your investments
During the current cycle of bull and bear markets, investors have seen their portfolios attain profits and undergo losses rather frequently. Even those with conservative investment models have suffered.
Older dentists in particular have seen dramatic market shifts take place. Dentists’ employer qualified retirement plans are generally considered safe investments. Based on a dentist’s age and retirement plan, however, potential retirement may have been delayed in the current market because a practice sale would not generate enough revenue on which to comfortably retire. Indeed, some dentists have deferred retirement to allow their retirement plan recovery time.
For younger dentists, a full recovery of asset values may be possible, depending on the number of years of employment remaining. These dentists may also wish to amend their retirement plans to adjust for nondiscrimination requirements (IRS statutes ensure that qualified plans do not discriminate in favor of higher paid employees) and increase contributions while reducing employees’ allocations.
What about dentists of all ages who can’t wait for market recovery and who wish to retire now, whether for health or personal reasons? What do these practitioners do to recover funds in their retirement plans due to market losses and increase the asset value of the plans that seemed so safe?
Will the Market Allow for Recovery of Value?
The answer may be that it is not possible for market improvement to replace losses and continue growth as previously intended, especially in a short period of time. The retirement plan will probably need assistance to approximate the expected value. Dentists can help recreate fund balance and maintain the plan’s health with some creative approaches to its funding levels.
There are three types of retirement plans: the defined contribution plan, the defined benefit plan, and a cash balance plan. With a defined contribution plan, money is deposited into it, which creates a tax deduction for the sponsor of the plan. It is typically discretionary whether a contribution is made. Its payout at retirement is based on what has been accumulated. Losses or profits either decrease or increase its value and payout. A defined benefit plan actually defines, by formula, what is to be disbursed at retirement. If there are losses, the retirement plan formula obligates the sponsor, which is the dental practice, to pay amounts into it to recover the losses. When the retirement plan has profits, this allows the dental practice to reduce amounts paid into it.
The third type of retirement plan, the cash balance plan, is a hybrid of the defined benefit and defined contribution plans. Within the cash balance plan, the third-party administrator can design the plan so that the dentist and his or her spouse receive 90% or more of the contribution, with the balance going to the remaining dental team members.
Making Changes to a Plan
For those who understand tax considerations, losses in retirement plans can cause you, as the employer, to place more funds into the defined benefit plan, because the losses will erode the financial assumptions that were originally used in the plan’s creation. The actual cost to the dentist in revaluing the retirement plan upwards can come with government assistance, because the dentist would be required to place more monies into the defined benefit plan (to make up for the aforementioned losses) and will then receive an increased tax benefit due to the increase in required retirement plan contributions.
Suppose you are near the top tax bracket and assume federal income, Social Security, and Medicare taxes (if you are the owner, you pay double Social Security and Medicare tax), as well as state income tax. Your effective overall tax rate is probably 50% or more, especially if you live in New York, New Jersey, or other states with high income tax rates. Retirement plans can be amended to increase contribution levels within discrimination guidelines that allow most of the contributions to go to the owners. Assistance comes from the state and federal government in the form of additional tax deductions for the employer-sponsored plan.
Taking the Next Steps
Certified public accountants (CPAs) who have experience with dentists (www.adcpa.org) as well as expertise in assisting with retirement plan design are a good first stop. CPAs know the dentist’s requirements for cash flow on a personal and practice level. If the CPA has the creativity and experience needed to understand how funds can be arranged and contribution levels adjusted to assist in overcoming losses, losses can be recovered and perhaps lessened. Using extensions of time to file tax returns, borrowed funds to save taxes at the 50% level, and personal funds deposited into the dental practice, if solely owned, will help make the contribution funding available.
About the Author
Bruce Bryen is a certified public accountant with more than 40 years of experience. He is the managing partner of the accounting firm Bryen & Bryen, LLP, which is based in southern New Jersey. Mr. Bryen specializes in retirement planning design, income and estate tax planning, determination of the proper organizational business structure, asset protection, and structuring loan packages for presentation to financial institutions. He can be contacted by calling 856-985-8550, ext. 112, emailing firstname.lastname@example.org, or visiting www.Bryen-BryenLLP.com.
more online @insidedentistry.net
Other articles from Bruce Bryen, CPA:
Enhancing a Dental Practice dentalaegis.com/go/id1026
Divorce/Partnership Disputes and Goodwill Allocations dentalaegis.com/go/id1027
A Wise Dentist’s Approach to Money Management dentalaegis.com/go/id1028